Stephen S. Cohen and J. Bradford DeLong (2010), The End of Influence: What Happens When Other Countries Have the Money (New York: Basic Books: 9780465018765).

When you have the money--and "you" are a big, economically and culturally vital nation--you get more than just a higher standard of living for your citizens. You get power and influence, and a much-enhanced ability to act out. When the money drains out, you can maintain the edge in living standards of your citizens for a considerable time (as long as others are willing to hold your growing debts and pile interest payments on top). But you lose power, especially the power to ignore others, quite quickly--though, hopefully, in quiet, nonconfrontational ways. An you lose influence--the ability to have your wishes, ideas, and folkways willingly accepted, eagerly copied, and absorbed into daily life by others. As with good parenting, you hope that by the time this happens those ideas and ways have been so thoroughly integrated that they have become part of what is normal and regular abroad as well as at home; sometimes, of course, they don't. In either case, the end is inevitable: you must become, recognize that you have become, and act like a normal country. For America, this will be a shock: American has not been a normal country for a long, long time.

January 2010

Saturday, January 30, 2010

The Wasted Opportunity « The Baseline Scenario: I thoroughly enjoyed reading The End of Influence by Stephen Cohen and Brad DeLong.*For one thing, it’s not specifically about the financial crisis (although that does play a role), so you don’t have to read the nineteenth explanation of how a CDO works or what a NINJA loan is. For another, it’s short–only 150 pages, and small pages at that–and easy to read, so it will probably jump your queue of books to read and you can cross it off your list in just a couple of hours.

Despite being a short book, it’s about a lot of things. The most obvious is the much-bemoaned fact that the U.S. is now a huge debtor nation and is unlikely to maintain its status as the world’s importer of last resort indefinitely, and what that all means. The most central, however, is probably the global shift away economic neoliberalism–the idea that governments should withdraw from the economic sphere and allow free market forces to work their magic, symbolized by the recent effort to convince sovereign wealth funds to behave like ordinary, return-seeking institutional investors (see pages 85-89). Cohen and DeLong show that the last few decades of neoliberalism are really just a historical blip and that most of history–including most of the post-World War II–saw plenty of government intervention, even industrial policy, in countries like France (TGV, Airbus, etc.) and the United States (via the Pentagon). They see a resurgence of industrial policy all around the world (although it never really went away–see China, for example), and even if it often ends badly, it is something we will have to reckon with.

If the book isn’t centrally about the financial sector and the financial crisis, though, they still have a minor starring role. In their account, the recent period in which developing countries wanted to lend us their dollar surpluses gave us a great opportunity: “It gave America the opportunity, while absorbing more and more routine manufacturing from Asia at the expense of those same industries at home,” to shift its own economy into what should have been the ’sectors of the future.’” Instead, though we shifted our economy into finance. “The freedom of action that the United States enjoyed because it had the money was squandered” (pp. 12-13).

Cohen and DeLong recount (in admirably condensed form) the charges generally leveled against the financial sector, but they also point out something that often is overlooked:

[Finance] had achieved the cultural dominance that so often goes hand-in-hand with economic dominance: its gigantism and ubiquity, its tonic impact on the entire economy, its fabulous success, the sheer gushing of money, its generous funding fo elected politicians, its seconding of its top executives to top posts throughout the regulatory apparatus of government, and its simple and powerful message of ‘let the market work its magic.’ It was so easy (pp. 112-13).

Cohen and DeLong do not make the financial sector the sole villain in their story. Another one is inequality: “Faced with stagnant incomes, seeing themselves falling behind those above them on the income scale, and spending their evenings watching Lifestyles of the Rich and Famous, what did the average American family do?” (p. 107). They worked more, and they borrowed more.

So where do we go from here? Although their book is all about the decline of U.S. financial power, Cohen and DeLong are far from prophets of doom. America simply needs to become a little bit more like a normal country–only a little, because we are still the world’s largest economy and its only superpower. “A drop in the value of the dollar, even a big drop, is not the end of the American economy” (p. 100). We don’t have as much weight to throw around in international meetings. I agree.

This is me talking now, not Cohen and DeLong: There is a lot of hand-wringing over global imbalances, but the answer is quite simple: the dollar needs to fall. Imported goods will get more expensive, but domestic goods won’t, and we’ll adapt. We won’t be able to dictate to the world as much as we used to, but frankly that’s a good thing, given how many other parts of the world we have messed up in our history and how wrong our extreme free market ideas turned out to be. In the long, long, long term, maybe the United States will become just another country–a larger, somewhat richer version of Canada, or Belgium, or Denmark, or something like that. We could do a lot worse.

Tuesday, January 19, 2010

The Agenda on National Review Online: Stephen S. Cohen and J. Bradford DeLong have just published The End of Influence, and it's excellent. Cohen and DeLong are both left-of-center, yet they occupy the technocratic end of the progressive movement, which explains their obvious sympathy for the aspirations of economic neoliberalism.
One of the central virtues of the book is the sustained attention Cohen and DeLong give to some of the lazy assumptions we make about the American economy: they note that while postwar mixed economy model of the United States was very different from the models that took root in Europe, it was just as statist and interventionist. My takeaway is that the conflict over U.S. political economy is better understood as a conflict between rival industrial policies, one centered on spurring the growth of the defense industries and the Sunbelt and another centered on old-line manufacturing and the Rustbelt, than as a battle between libertarians and social democrats.
The key driver for Cohen and DeLong has been large American trade deficits that have poured resources into oil-producing states and East Asia's manufacturing powerhouses. Rather than consume the dollars they earn, these states have increasingly placed them in large state-controlled sovereign wealth funds that are becoming a crucial source of investment capital for firms around the world. The question is, will these sovereign wealth funds behave like conventional private funds that aim to maximize returns — or will they seek to serve other national interests?
I wrote a far-from-flawless and rather pessimistic column on the book, which focuses on how the decline of American economic power is leading us to a new global equilibrium in which beggar-thy-neighbor mercantilism will become even more pervasive. I think of myself as a fairly upbeat person, but I can't imagine a worse state of affairs, not least because it will exacerbate the risk of great power conflict.
All in all, this is a really terrific book that does an excellent job of cutting through the confusion surrounding the broader meaning of the financial crisis, etc. If there is a bright high schooler or young adult in your family, this would make a great present. It helps that the book is mercifully short, weighing in at just over 150 pages.

Friday, January 15, 2010

Project Syndicate : CAMBRIDGE – Thirty years ago, China had a tiny footprint on the global economy and little influence outside its borders, save for a few countries with which it had close political and military relationships. Today, the country is a remarkable economic power: the world’s manufacturing workshop, its foremost financier, a leading investor across the globe from Africa to Latin America, and, increasingly, a major source of research and development. The Chinese government sits atop an astonishing level of foreign reserves – greater than $2 trillion. There is not a single business anywhere in the world that has not felt China’s impact, either as a low-cost supplier, or more threateningly, as a formidable competitor.

China is still a poor country... incomes have... still stand at between one-seventh and one-eighth the levels in the United States – lower than in Turkey or Colombia and not much higher than in El Salvador or Egypt.... Nevertheless, China’s economy is projected to surpass that of the US in size sometime in the next two decades. Meanwhile, the US... stands humbled by its foreign-policy blunders and a massive financial crisis... its economic model is in tatters....

All of which raises the question of whether China will eventually replace the US as the world’s hegemon, the global economy’s rule setter and enforcer. In a fascinating new book, revealingly titled When China Rules the World , the British scholar and journalist Martin Jacques is unequivocal: if you think China will be integrated smoothly into a liberal, capitalist, and democratic world system, Jacques argues, you are in for a big surprise. Not only is China the next economic superpower, but the world order that it will construct will look very different from what we have had under American leadership.

Americans and Europeans blithely assume that China will become more like them as its economy develops and its population gets richer. This is a mirage, Jacques says.... A world order centered on China will reflect Chinese values rather than Western ones, Jacques argues. Beijing will overshadow New York, the renminbi will replace the dollar, Mandarin will take over from English, and schoolchildren around the world will learn about Zheng He’s voyages of discovery along the Eastern coast of Africa rather than about Vasco de Gama or Christopher Columbus. Gone will be the evangelism of markets and democracy. China is much less likely to interfere in the internal affairs of sovereign states. But, in return, it will demand that smaller, less powerful states explicitly recognize China’s primacy....

China’s stability hinges critically on its government’s ability to deliver steady economic gains to the vast majority of the population. China is the only country in the world where anything less than 8% growth year after year is believed to be dangerous because it would unleash social unrest....

The authoritarian nature of the political regime is at the core of this fragility. It allows only repression when the government faces protests and opposition outside the established channels.

The trouble is that it will become increasingly difficult for China to maintain the kind of growth that it has experienced in recent years. China’s growth currently relies on an undervalued currency and a huge trade surplus. This is unsustainable, and sooner or later it will precipitate a major confrontation with the US (and Europe). There are no easy ways out of this dilemma. China will likely have to settle for lower growth.

If China surmounts these hurdles and does eventually become the world’s predominant economic power, globalization will, indeed, take on Chinese characteristics. Democracy and human rights will then likely lose their luster as global norms. That is the bad news. The good news is that a Chinese global order will display greater respect for national sovereignty and more tolerance for national diversity. There will be greater room for experimentation with different economic models.

Tuesday, January 12, 2010

Observing Japan: A new alliance in the making: Foreign Minister Okada Katsuya has arrived in Hawaii for a Tuesday morning meeting with US Secretary of State Hillary Clinton. Following weeks of bilateral acrimony, the two will discuss negotiations to strengthen bilateral cooperation on the occasion of the fiftieth anniversary of the US-Japan mutual security treaty, signed fifty years ago this month.

For the moment it appears that the US will — not without displeasure — set Futenma aside while a defense ministry team considers possible alternatives for building a replacement facility at Henoko bay. In advance of her meeting with Okada, Clinton said, echoing a recent New York Times op-ed by Joseph Nye (more on this in a moment), that the alliance is more important than Futenma, and she and Okada will discuss ways to improve cooperation instead of dwelling on the contentious base issue.

It is about time that the Obama administration stepped back from the brink. The administration ought to have known better. It is one thing to state that the US government understands the Hatoyama government's political constraints; it is another to act on the basis of this recognition and play it cool, recognizing that perhaps there is something unseemly about the US government's leaning heavily on the first Japanese government headed by a party other than the (longtime US client) LDP to abandon a campaign promise within weeks of taking power.

Nye's counsel of patience is well-timed and appropriate — as is his admonition that "a victory on Futenma could prove Pyrrhic" if it comes about through a heavy-handed approach to the Hatoyama government. Also appropriate is his reminder that the bilateral relationship is about China, as it was when Nye was at the Pentagon spearheading the review of the alliance in 1995. "Integrate, but hedge," writes Nye.

The problem, however, is that 2010 is not 1995. Japanese leaders and the Japanese public remain concerned about China's rise, but Japan's economy is far more dependent on China's than it was in 1996 when the US and Japan reaffirmed their security relationship. If anything, the idea of a threatening rise seemed clearer in 1996, when China was menacing Taiwan, than today, with China, its economy growing even as the developed economies struggle to recover from the global financial crisis, continuing to modernize its armed forces. Today China is an indispensable participant in global meetings but also, perhaps, a hegemon in waiting in East Asia. At the same time, the value of the US-Japan alliance as a security relationship may be less valuable today than in 1995. It would only be sensible for Japanese officials to wonder about the value of the US deterrent after what Stephen Cohen and Brad DeLong call "the end of influence." As they write in their new book by that title: "As money alters power relations, the United States is not simply becoming dependent — but it is no longer independent, either. That is a major change. And China is no longer helpless and cowed in face of the superpower hegemon; it has got a grip on it. Indeed, while the world peeks in, the two countries are realizing that they have thrown themselves into an intimate economic embrace with, to say the least, very mixed feelings."

The alliance is by no means valueless, but the terms certainly have changed. Japan can no longer afford to be wholly dependent on the alliance as its hedge against a violent turn in China's rise, because the US commitment may be less than ironclad. Even politically, Japan has plenty of reasons to desire good relations not just with China — as it watches the US develop the bilateral relationship described by its current secretary of state as the world's most important — but with other countries in the region that eye China warily even as they profit from its rise. The Futenma feud has, to a certain extent, drawn attention away from the Hatoyama government's other initiatives: the prime minister's multilateral diplomacy, but, more importantly, his visit to India, his government's first negotiations with Russia over the Northern territories (of particular importance to Hatoyama as the grandson of Ichiro, who restored Japan's relations with the Soviet Union in 1956), and the possibility of a rejuvenated partnership with South Korea. Analysts who see Japan's foreign policy decision as a dichotomous choice — the US or China — are missing the reality that Japan prefers to be dependent on neither, or rather prefers good relations with both (a "dual hedge") and moreover close relations with other countries in the region as a hedge against US-China competition and cooperation. It will take time for these diplomatic initiatives to bear fruit, but the Hatoyama government is moving forward with a clear vision. It recognizes the need to enhance Japan's influence in the region, and by signaling a renewed willingness to make amends for Japan's wartime past and a desire to deepen Japan's economic ties within the region (an important theme of the government's new growth strategy), the Hatoyama government is developing an Asia-centered foreign policy.

The question for the US and Japan going forward is what role the alliance can play in this more fluid regional environment...

Monday, January 11, 2010

Siris: Debt to decide stocks' fate: Here at the start of a new decade, I think the dominant investing and economic theme of the next 10 years will revolve around how we and the world deal with the U.S. as the largest debtor nation.

In a new book, “The End of Influence: What Happens When Other Countries Have The Money,” by Steven Cohen (one of the best professors I ever had) and Brad DeLong, the authors explain how U.S. money shaped the world economy in the last century.

As the dominant economic power, we set the rules. We influenced others to adopt capitalism. We influenced governments to have democratic elections. We used our economic clout to get others to follow our lead militarily.

The world is now changing. We are still the richest country, but we are also the largest debtor nation. U.S. consumers are in hock, while our government owes trillions.

How this will be resolved is complex. There is a dance going on between the U.S. and other countries that is the economic equivalent of nuclear deterrence. We keep borrowing too much, but no one really objects because other countries need our consumers to support their economies and because they own too many dollars to trash our currency.

“If you owe the bank $1,000 dollars, you’re broke. If you owe the bank $10 million, the bank is broke,” the old saying goes. In other words, the U.S. economy is way too big to fail.
Going forward, the U.S. will lose political power, as Cohen and DeLong see it. Many countries will follow the lead of the rich nation raining dollars, but fewer will follow the lead of the debtor. That means while we are financing wars, China and others are gaining economically.

The world economic system is also starting to change. We advocate free enterprise, but other countries have more centrally planned economic systems. They are using massive government resources to build 21st century industries. The question is: Can capitalism compete against businesses that are heavily subsidized by foreign governments?

The biggest issue may concern what other countries are going to do with their dollars. They cannot just dump them. The dollar is the underpinning of the world economy. If the dollar plunges in value, our creditors will be the big losers. But these countries can use them in different ways — like becoming more active in buying U.S. companies.

For investors, despite the gains in the stock market, I think the next few years will be choppy, especially with high unemployment.

Export businesses should do well, as the dollar drifts down, but I think consumer-dependent companies and real estate industries will continue to be weak.

Emerging markets, as well as Japan, will grow faster than the U.S.

Interest rates will go up. If we take a hard line with some of our creditors, the increases could be significant, making long-term bonds a bad bet — and putting a cap on the stock market.

The most problematic question is whether the U.S. will be able to adjust to being a debtor nation and having other countries set more of the rules. We may not have a choice.

At lunch on Friday you couldn't answer the question, "Who is the intended audience?' and not because of the poor grammar. I don't know about intentions, but clerarl the reader will be the subscriber to the NY Review of Books. I eschew that Review, but I did enjoy the book, nevertheless.

The Revenge Of Mercantilism - Forbes.com: In 1957, British Prime Minister Harold Macmillan gave a rousing speech in the town of Bedford celebrating the country's postwar economic progress. After years of rationing and shortages of basic consumer goods, Macmillan noted that industrial production was shooting up, and that as a result "most of our people have never had it so good." Macmillan was undoubtedly right.

Though Britain's economic power had evaporated, the quality of life for the working and middle class really had improved, thanks in part to the advent of the welfare state. Even then, there was something strangely off about Macmillan's optimism. He was a Conservative who opposed Labour's brand of socialism, yet he was also its steward. And as the decades that followed made clear, Britain's mixed economy, defined by state ownership of key industries and a ferociously adversarial politics, was falling far behind the mixed economy model that prevailed in France and West Germany, where political and economic elites worked hand in glove to promote modernization and rapid growth.

At the time, the British model seemed to make sense. Almost all leading thinkers saw it as vastly preferable to the anarchy of pure free-market capitalism, and to the pro-rich policies that prevailed in France and West Germany. This view was all wrong, of course. But there was no way to know that in 1957.

What was clear, however, was that Britain had lost its freedom of action. Throughout the Second World War and its immediate aftermath, the United States drove hard bargains with a British Empire that was fighting for its life. In 1956, during the Suez Crisis,President Dwight Eisenhower brought Britain and France to heel, threatening to inflict serious economic pain if they didn't abandon a military intervention in Egypt. While this humiliating reversal didn't change the fact that "most of our people have never had it so good," it is easy to see why Britons might have felt otherwise. Over 50 years on, Americans are experiencing a similar unease.

In their new book The End of Influence, Stephen S. Cohen and J. Bradford DeLong vividly describe the evaporation of American economic power and what it is likely to mean for the United States and the world. Cohen and DeLong are shrewd observers, and they recognize that no country, least of all China, can simply replace the United States as the world's economic hegemon. Rather, they suggest that we're living through the unraveling of a basically benevolent neoliberal era, in which debt-financed American consumption fueled rapid growth throughout the world. Resource exporters, from Norway to Abu Dhabi, have avoided the dreaded "Dutch disease" by using their export earnings to build enormous sovereign wealth funds.

In East Asia, meanwhile, state-led development policies, ranging from "administrative guidance" from state-owned or state-controlled banks to currency manipulation aimed at preserving highly competitive exchange rates, spurred growth in the export sector while suppressing domestic demand. And by suppressing domestic demand, I mean that these policies keep savings rates very high and families very poor. East Asian surpluses have also been poured into sovereign wealth funds. The end result has been that American consumers enjoy cheap manufactured goods while emerging East Asian economies have poor populations but a powerful hedge against currency crises. If these countries could rely on better global institutions to protect themselves against financial crises, they wouldn't have to engage in this wasteful form of self-insurance.

In a sense, American economic power is flowing directly into these sovereign wealth funds, which continue to evolve. Norway's sovereign wealth fund is highly transparent and functions like a large American pension fund, emphasizing financial returns over other objectives. We shouldn't be surprised, however, if the sovereign wealth funds of other less-affluent, less-transparent and less-exemplary countries choose to advance the national interest through other means. Given that the money bottled up in China's sovereign wealth funds is essentially extracted from its hard-working population, why shouldn't the Chinese government use it to acquire American firms and transfer their technology and manufacturing facilities to China? This isn't the classic model of offshoring, in which technology transfer happens in response to market forces. Instead, it is a form of mercantilism with the potential to hollow out global free trade.

In the United States and Europe, Cohen and DeLong observe that "lemon socialism"--the policy of bailing out and taking ownership stakes in failing industrial and financial firms--provides another powerful impetus for state-led development policies. When the U.S. government bails out GM and Chrysler, it's rather precious to insist that the German government refuse to do the same thing. Moreover, as governments pour money into industrial firms that have become multinational, there are not-so-subtle pressures to freeze out or underfund foreign subsidiaries. If demand for automobiles continues to shrink in the developed world, overcapacity will reach comic proportions. As for expanding markets in China and India, one imagines that they will be served, badly of course, by heavily subsidized national champions closer to home.

After sparking a wave of free-market global growth that has transformed the world for the better, America's debt-financed spending binge seems to have ended with vast state-controlled pools of money calling the shots. The supposed anarchy of free-market capitalism is once again being replaced by a more regimented and statist world order. The result will be a poorer and more dangerous world, defined by zero-sum competition, deep distrust, and political elites that will line their pockets at the expense of the powerless and vulnerable. Somehow, believers in free markets and social democrats, in the U.S. and around the world, will have to unite behind a more constructive agenda, a neoliberalism tempered by a far heavier emphasis on the interests of the global poor and the global middle class. Cohen and DeLong don't offer a road map as to how we can do this, but they do offer an invaluable diagnosis of the darker world to come.

Saturday, January 09, 2010

Underbelly: Appreciation: Cohen and DeLong on The Future: Readers who want the core argument from The End of Influence by Stephen Cohen and Brad DeLong might consider this roadmap: read the first chapter; then skip to Chapter 6 (State-led Development) and read the first half; then Chapter 7. (Conclusion). That will give you the takeway points (or keep reading this review and pick up another version of the takeaway points below) (or see this helpful excerpt in FP).

Am I saying you shouldn't read the rest of the book? Hm. Well, if you do skip the rest, you'll miss out on a lot of cool factoids about the current macro environment--the kind of thing that makes you such a damn nuisance so loveable at parties. But if you follow DeLong's hugely successful weblog, you know a good deal of this stuff already. On the other hand, if you don't read the intervening chapters, you'll miss out on the frustration of trying to cope with an absorbing and instructive--but maddeningly ill-organized--presentation. The book, to be blunt, shows all the earmarks haste, as if the authors felt they just had to get an oar in at this juncture of the debate, rather than think through a more complete project.

Item: there's a lot of discussion here of "the neoliberal order" (aka neoliberal dream, neoliberal utopia, neoliberal program, neoliberal game, neoliberal age, neoliberal worldview)--all without any effort at precise definition, nor (this is more important) any effort to specify just why it is so central. Item: there's a useful introduction to "sovereign wealth funds" with little to connect the dots as to how they fit into the larger argument. Item, there's a discussion of dirigiste economic growth, provocative but entirely inconclusive (Can anybody do it? Can we do it? Have we done it? Will others do it? Should we try it? etc.).Item: there's an elegant menu of competing paths to development which seems on the face of things almost entirely irrelevant to the business at hand. Item: there's a swell tour d'horizon of foreign-exchange issues, instructive if you ignore the fact that it seems almost to contradict the main line of argument.

So, of course you'll read it. But you'd better be prepared to structure a lot of the argument yourself. Let me see if I can give a summary:

In the future, we won't be as powerful as we have been in the past; because

We won't be as rich;

Relatively [and also absolutely?], such that

In fact, nobody, will be able to dominate the way we have dominated since world war II. This will lead to

Wasteful, beggar-thy-neighbor strategic infighting.
This is a perfectly intelligible set of propositions, debatable of course (not least because we are predicting the future here), but still worth reflection. As to the first couple (not as powerful, not as rich), it happens that I believe them to be true. They are also at this point pretty familiar stuff ("that's all?" said Mrs. Buce with a dismissive snarl; she outsources macro policy to me and expects a higher-value-added return).

The last couple of pointts (infighting, beggar-they-neighbor--dare I call it mercantilism?)--are interesting and might be right, although I'd need a lot more by explicit argument to be persuaded. But this is where I could use lot more careful analysis.

Example: consider "the neoliberal (whatever)"--by which I take it they mean "the way we have lived for the last 40 years:" increasingly unfettered free markets. CD seem to be assuming that this "neoliberalism" has been discredited by the late uproar and will therefore vanish into the sunset. I'd need a lot more persuading. There is a lot of money and power that rides on the legitimacy of the market model, and these guys have no instinct to go away--hell, they don't even know they've been discredited.

Example: I am really not at all clear why they are telling me what they tell me about foreign exchange. They observe that lots of people, for a long time, have been forecasting s calamitous decline in the exchange value of the dollar. And yet it hasn't happened. There may be good reasons why it hasn't happened: we offer political stability; world lending is still dollar denominated; the lenders are locked in. Sure, fine, but what exactly does this have to do with their more general argument? Stated baldly (but this cannot be their point) it seems to suggest that we might not be losing our wealth and power and influence anywhere near as fast as might at first glance appear.

A final example: CD seem to be trying to tell us that sovereign wealth funds necessarily exercise "political" or perhaps "strategic" power instead of mere "economic" power, as we might expect from a neoliberal enterprise. The more I look at that one, the more skeptical I become. My present inclination is to surmise that the critical factor is "bigness," and that huge "private" corporations" might well start acting like (or in concert with) states; while "sovereign" funds might perfectly well find that money is more fun than politics.

Which brings me to a final, more general, point. That is: if there is an important flaw in their general argument, it may lie in their (implicit) assumption about the nature of states. They seem to presuppose a static model of statehood--the kind of thing we've come to take for granted since the Treaty of Westphalia. That would mean: a state that makes at least a pretense of commitment to "a common good," to the maintenance of public order, to the administration of justice. It would mean a state professing (however hypocritically or ineffectually) to the welfare of its people.

I think they may failing to consider just how transitory, perhaps accidental, this model might be--a lucky accident, like the very existence of life in the universe. We've lived so long (and in the US, so well) on that state model, that we forget how quickly and easily and completely it might pass away. There are already signs of states weakening everywhere--not just the basket cases like Somalia or Afghanistan, but in so many places where the ligaments of the (if you'll permit me) Enlightenment model may seem to be coming unglued.

This is a nightmarish scenario and I certainly hope I am just grotesquely wrong. If it does come to pass, what then? I don't even pretend to have a very clear idea, but whatever idea seems to boil down to two overlapping concepts: tribes, and cartels. As CD observe, we also have a half a dozen or so sovereign wealth funds that we find we must treat as players in their own right. CD seem to assume (although they don't quite say) that we should treat them as arms or allies of the stat. But what if they simply are the state? Or simply self-sustaining states-within-a-state, nesting in some vestigal state womb, but answering to no one but themselves (and each other)? What then, huh? I have no idea;it's an incomplete picture and thank heavens for that, because it isn't very pretty and I'm not in the mood for a nightmare. But I think I'd have to cope with it before I went public with any grand propositions about the future.

I don't think CD have considered this possibility (or perhaps they simply think it is too ridiculous even to consider). Yet I'd say it is one testimony to the power of this absorbing and provocative book that it generates the thought of such a bleak alternative.

Wednesday, January 06, 2010

Link exchange: The American financial crisis and recession is producing some very high quality reflection on American power and potential for decline. James Fallows has a new essay on the subject, and Brad DeLong and Stephen Cohen address such issues in a new book, excerpted this week at Foreign Policy. (Atlantic, Foreign Policy)

Tuesday, January 05, 2010

FT.com / Columnists / Gideon Rachman - America is losing the free world: Ever since 1945, the US has regarded itself as the leader of the “free world”. But the Obama administration is facing an unexpected and unwelcome development in global politics. Four of the biggest and most strategically important democracies in the developing world – Brazil, India, South Africa and Turkey – are increasingly at odds with American foreign policy. Rather than siding with the US on the big international issues, they are just as likely to line up with authoritarian powers such as China and Iran.... Most Americans assume that fellow democracies will share their values and opinions on international affairs.... But the assumption that the world’s democracies will naturally stick together is proving unfounded. The latest example came during the Copenhagen climate summit. On the last day of the talks, the Americans tried to fix up one-to-one meetings between Mr Obama and the leaders of South Africa, Brazil and India – but failed each time. The Indians even said that their prime minister, Manmohan Singh, had already left for the airport. So Mr Obama must have felt something of a chump when he arrived for a last-minute meeting with Wen Jiabao, the Chinese prime minister, only to find him already deep in negotiations with the leaders of none other than Brazil, South Africa and India. Symbolically, the leaders had to squeeze up to make space for the American president around the table.

There was more than symbolism at work. In Copenhagen, Brazil, South Africa and India decided that their status as developing nations was more important than their status as democracies... both Brazilian and Chinese leaders have made the same pointed joke – likening the US to a rich man who, after gorging himself at a banquet, then invites the neighbours in for coffee and asks them to split the bill. If climate change were an isolated example, it might be dismissed as an important but anomalous issue that is almost designed to split countries along rich-poor lines. But, in fact, if you look at Brazil, South Africa, India and Turkey – the four most important democracies in Latin America, Africa, Asia and the greater Middle East – it is clear that none of them can be counted as a reliable ally of the US.... In the past year, President Luiz Inácio Lula da Silva of Brazil has cut a lucrative oil deal with China, spoken warmly of Hugo Chávez, president of Venezuela, and congratulated Mahmoud Ahmadi-Nejad on his “victory” in the Iranian presidential election, while welcoming him on a state visit to Brazil. During a two-year stint on the United Nations Security Council from 2006, the South Africans routinely joined China and Russia in blocking resolutions on human rights and protecting authoritarian regimes such as Zimbabwe, Uzbekistan and Iran. Turkey... is also no longer a reliable partner for the west. Ever since the US-led invasion of Iraq, opinion polls there have shown very high levels of anti-Americanism.... India’s leaders do seem to cherish the idea that they have a “special relationship” with the US. But even the Indians regularly line up against the Americans on a range of international issues, from climate change to the Doha round of trade negotiations and the pursuit of sanctions against Iran or Burma.

So what is going on? The answer is that Brazil, South Africa, Turkey and India are all countries whose identities as democracies are now being balanced – or even trumped – by their identities as developing nations that are not part of the white, rich, western world.... Mr Obama is seen as a huge improvement on George W. Bush – but he is still an American president. As emerging global powers and developing nations, Brazil, India, South Africa and Turkey may often feel they have more in common with a rising China than with the democratic US.

Matthew Yglesias: The End of Influence: I downloaded The End of Influence: What Happens When Other Countries Have the Money by Brad DeLong and Stephen Cohen last night and read the whole thing. From this you can draw three conclusions. One: The book is good. Two: The book is pretty short. Three: I didn’t get as much sleep as I was hoping from a “stay in and read a book” evening.

The title implies an entrant into the American declinism literature, but the thesis offered on this score is actually extremely mild. If you didn’t already know that America’s relatively geopolitical influence 20 years from now will be less than it was 10 years ago, then you really haven’t been paying attention. DeLong and Cohen don’t think China is suddenly going to become Number One Nation or anything.

What you really get here is a brilliant short tour of the rise and fall of the neoliberal project on an international basis. They offer what will strike some as an almost laughably uncynical account of the motives behind this project, but that makes the documentation of its ultimate failure all the more compelling. As they lay out, it proved to actually be the case that the only route to sustainable economic development anyone could find involved substantial state-directed export-orient

ed growth. This, in turn, required the United States to play the role of global importer of last resort. The up shot of this is that more and more America doesn’t have “the money” in the world system. And not only is the money in the hands of Asian exporters and oil producers, a very large portion of it is in the hands of sovereign wealth funds. In addition, the Panic of 2008 has left governments in the developed world with large ownership stakes in a variety of firms. As a result, we’re going to have to transition to a very different-looking world economic order--one in which self-conscious government planning is going to play a bigger role, one in which US living standards will decline relative to our major trading partners, and in which American cultural and ideological influence is likely to wane.

How America Can Rise Again: At a dinner in Washington this fall, I heard a comment that summed up the combination of satisfaction and concern that ran through many of the interviews I held. The day before the dinner, three U.S. citizens had been named the winners of the Nobel Prize for physiology or medicine. The day after, three more would be named winners of the Nobel Prize for physics. All the more impressive for America’s attractive power, four of the six winners had been born outside the country—in China, Canada, Australia, England—and had taken U.S. citizenship, in some cases jointly with their original country, while they trained and did work at U.S. or other foreign institutions. The dinner discussion topic was the future of America’s scientific-research base—and the prize announcement, rather than a cause for celebration, was taken almost as a knell. “This was for work done 10 or 20 years ago, based on research funding that started 30 or 40 years ago,” the main speaker, the CEO of a famous Silicon Valley firm, said. “I don’t know what we’re funding that will pay off 30 years from now.”

“After almost a century, the United States no longer has the money,” the economists J. Bradford DeLong and Stephen Cohen, both of Berkeley, write in their new book, The End of Influence.

It is gone, and it is not likely to return in the foreseeable future … The American standard of living will decline relative to the rest of the industrialized and industrializing world … The United States will lose power and influence.

This judgment differed from many others I heard mainly in being more crisply put.

So the question is: Are the fears of this moment our era’s version of the “missile gap”? Are they anything more than a combination of the two staple ingredients of doom-and-darkness statements through the whole course of our history? One of those ingredients is exaggerated complaint by whichever group is out of political power—those who thought America should be spelled with a “k” under Nixon or Reagan, those who attend “tea bag” rallies against the Obama administration now. The other is what historians call the bracing “jeremiad” tradition of harsh warnings that reveal a faith that America can be better than it is. Football coaches roar and storm in their locker-room speeches at halftime to fire up the team, and American politicians, editorialists, and activists of various sorts have roared and stormed precisely because they have known this is the way the nation is roused to action.

Today’s fears combine relative decline—what will happen when China has all the jobs? and all the money?—with domestic concerns about a polarized society of haves and have-nots that has lost its connective core. They include concerns about the institutions that have made America strong: widespread education, a financially viable press, religion that can coexist with secularism, government that expresses the nation’s divisions while also addressing its long-term interests and needs. They are topped by the most broadly held alarm about the future of the natural environment...

Monday, January 04, 2010

Brad DeLong writes and edits a wide ranging blog focussed on ,for lack of a better title, political economy and this short book is a fine, and very well written summation of many of the themes he has been discussing over the past few years. Written with a Berkeley colleague it is a well researched (though no notes are in the text, alas) book whose theme can be simply described by its title. However, unusually for economists, it goes far beyond the standard laments and cries over our waning economic power and delves deeply into global cultural and intellectual maters and their relation to the fiscal decline we are living through. In some ways this is even a more enduring and disturbing aspect of the mess we have mostly brought on ourselves. This may be one of the first in what could be long series of books on these subjects but I would bet it will remain one of the most succinct and influential of the future lot.

Richard Pachter:: I've long thought that the best advice one can give a youngster seeking success in the business world is to learn Chinese. Our pals in Beijing and Shanghai hold serious paper on us ("Us, U.S.," as Paul Harvey used to say) and they can wreak terminal havoc upon America, its institutions and infrastructure, if and when they chose. But it's not really in their best interests to ask us to ante up and watch us turn our pockets inside out, show our empty hands and shrug.

Why?

Cohen and DeLong invoke the quote, "If you owe the bank $1 million, the bank has you; if you owe $1 billion, you have the bank," then spend much of the rest of the book explaining why and how it's true. Along the way, they discuss the failure of neoliberalism, which sought to transfer portions of the control of the economy from the public to the private sector, skewer former Fed head Alan Greenspan, and describe with palpable awe the pandemic failure to oversee credit and banking in the United States and the major role it played - and continues to play - in our ongoing economic meltdown. The rampant corruption of the political system is also calmly recounted as a powerful catalyst for this dissolution and dispersal of American wealth. Though both authors are academics, they're rather decent writers; DeLong is also a blogger who struggles online daily to make sense of various economic effluvia and ephemera with a combination of alacrity, disgust and amusement. But this book is far from a knee-slapper and unlikely to be chosen by Ms. Winfrey for her book club.

They cover a fair amount of ground here and their depiction of the loss of U.S. influence is tempered by their rational, non-alarmist manner. Though resistant to speculation on things that are obviously unknown and unknowable, the pair does spell out the fading power of government and private industry to collaborate on industrial and scientific innovation. The authors leave any horrific conclusions and sensational scenarios to others.

The absence of requisite funding will hit this area quite hard, they surmise. The natural constituency for this alarm might be found in either political party, though both are focused on other things. They may eventually wake up just in time to do nothing but howl and raise impotent ire, however.

Overall, the loss of U.S. dominance due to lack of governmental largess might promote more multilateralism, as we become just another country, rather than the planet's sole superpower. It may force some of our beneficiaries to stand on their own and opponents to focus inward. It may also further the domestic growth of China as their credit ceases to subsidize and support our consumption of their consumer goods. After all, it's a very big country and is already growing faster than any economy on the planet.

Cohen and DeLong's interesting look at the real New World Order is worthy of consideration as it describes a reality that's fast approaching.

Soundview's Executive Book Alert: Debt Be Not Proud: A comedian once remarked that the invention of caller number identification, better known to everyone as "caller ID," did more to drive up debt in the United States than any other creation. It allowed thousands of American households the freedom to rack up credit card debt without ever having to answer the repeated calls from collection agencies. Over the course of the past three decades, "massive personal debt" has replaced baseball and apple pie as the most apt conclusion to the phrase "As American as ... ." In the ultimate case of stone-throwing by a glass mansion owner, the U.S. government has repeatedly cautioned its citizens about the dangers of accruing personal debts. According to authors Stephen S. Cohen and Brad DeLong, the U.S. Treasury would do well to invest in caller ID because the land of plenty is on the fast track to hearing from its creditors.

Cohen, a professor of regional planning, and DeLong, an economist, combined forces at the University of California, Berkeley to produce the upcoming release The End of Influence: What Happens When Other Countries Have the Money. In a compact, information-rich book, the pair outline America's staggering decline from a country that ended World War II with outrageous wealth and power to its current standing as a cash-poor nation whose global credit card is likely to meet with a giant pair of scissors. The story of how the nation reached this point is one that mirrors the path taken by so many of its citizens. Readers will likely get the impression that America never intended for its economic situation to get this far from its reach. However, life at the top affords certain luxuries and when, as various business authors have noted in books on leadership, a leader is surrounded by "yes" men, the leader gives less and less consideration to alternative points of view.

The End of Influence is not another in the recent chain of doomsday prophecies, envisioning an America that is suffocated by the squeeze of the Chinese Yuan to the west and the Euro to the east. Cohen and DeLong contend that America 's unique position as the world's lone superpower will vanish due to the country's irreversible debt. This does not mean the U.S. will descend the global ladder into the nether reaches of third-world status. It would be impossible for the third most populous nation on the planet to see its dominance in the realm of innovation disappear overnight. America is, after all, still the only nation to have put at least one of its citizens on the surface of a celestial body other than our own, even if that achievement occurred 40 years ago. Cohen and DeLong suggest that America 's debts will lead it to be "relegated" to status as a normal country, a position that, they assert, the U.S. has not held since the days of steamship travel.

The authors also provide key insight into a frequently discussed statistics. Executives are likely to have heard the chestnut that the Chinese government owns more American currency than the U.S. itself. The implications of this rumor have always stated that, if it desired, China could respond to American political posturing by flooding the market with dollars, thereby devaluing the greenback and shattering the American economy. This may lead readers to wonder why this has yet to occur. Cohen and DeLong answer the great China debate with another well known axiom that can be paraphrased in this way, "If you owe the bank $1 million, that's your problem. If you owe the bank $1 billion, that's the bank's problem." The End of Influence points out that the amount owed to China by the U.S. is roughly 50 percent of China 's Gross Domestic Product. The authors occasional humorous jab when revealing statistics such as this will help ease any reader tension at the state of America 's business affairs.

The End of Influence is a book that deserves a CEO's attention. Readers who tend to contain their reading of The Wall Street Journal to the domestic financial news may want to brush up on international markets and policymaking before opening Cohen and DeLong's book. As the reader progresses through the text, he or she will see that it's a title that is less about the financial impact of America 's debt and more about the way in which that debt will lead to the loss of a political foothold. To put it in slightly humorous terms, America can no longer arrive at the global restaurant sans reservation and expect the best seat in the house, but the nation isn't at the point yet where its table will be outside the kitchen door.

Ken Houghton of Angry Bear directs us to Floyd Norris:
>Shareholder Value: Floyd Norris Blog: Three numbers, courtesy of Howard Silverblatt of Standard & Poor’s, shed some light on what companies did with their cash during boom times: Over the last four years, since the buyback boom began, from the fourth quarter of 2004 through the third quarter of 2008, companies in the S.&P. 500 showed:
>* Reported earnings: $2.42 trillion
>* Stock buybacks: $1.73 trillion
>* Dividends: $0.91 trillion
>As a group, every dime they made, and more, went to shareholders. Roughly $2 went to shareholders who sold out for every $1 that was paid in dividends to shareholders who held on to their shares.

The FP piece was strong, but I felt it needed another few pages with more articulation about what this decline in influence really portends for the near-term middle distance, and a game plan to capitalize on the shifts in current. But, hell, that's what you'll tell us about on Terry Gross...

The End of Influence « Affaires étrangères: Another Zakaria-esque, post-America treatise, The End of Influence argues that American political, economic, and cultural influence is waning, though it remains–and will remain–the dominant force in international relations: “America is sure to remain a leader in cultural power, but there is a difference between being a cultural leader and an easy, almost un-self-conscious cultural dominance.”

When you have the money -- and "you" are a big, economically and culturally vital nation -- you get more than just a higher standard of living for your citizens. You get power and influence, and a much-enhanced ability to act out. When the money drains out, you can maintain the edge in living standards of your citizens for a considerable time (as long as others are willing to hold your growing debt and pile interest payments on top). But you lose power, especially the power to ignore others, quite quickly -- though hopefully, in quiet, nonconfrontational ways. And you lose influence -- the ability to have your wishes, ideas, and folkways willingly accepted, eagerly copied, and absorbed into daily life by others.

These words are very true. Sadly almost no Americans yet recognize that the "light on a hill" that Reagan proclaimed has gone out and that the future for America will be increasingly grim. (Ironically it was Reagan's budget-breaking policies that helped bust the nation.) It is interesting to see DeLong and Cohen are willing to admit a truth of diminished American power which has not yet dawned on Americans.

These authors make the following point which will have very interesting implications in the coming years, implications which Americans are yet to recognize:

If you owe the bank $1 million, the bank has you; if you owe $1 billion, you have the bank. The implication is that China, the biggest and most important holder of U.S. debt, is trapped into a strange, unwanted, and uncomfortable embrace with the indebted United States. The Chinese government holds about $2.5 trillion in foreign reserves, probably 70 percent of that U.S. obligations. This comes to over $20,000 per U.S. household; there is no way the United States could readily pay it back. Because it also amounts to about half of China's GDP, China can't just write it off.

Thus, China and the United States are economically co-dependent, the producer and consumer, the creditor and the debtor. ... We're bound together, and we must manage this mutual dependence carefully and, over time, wind down those economic imbalances. Populist reactions in the United States and China must also begin to work more broadly as partners to stabilize a world in political, social, and economic disarray.

So perhaps it won't matter, at least not very much. We can hope. But one thing is sure: Absent an international economic catastrophe or a major war or another game-changing disaster, the money will not soon be coming back to America.

The world has changed. Americans need to wake up to their reduced role in the world. Unlike the Bush years, a fantasy period, in which America took a 'go it alone' stance, the reality is that the world is fragile and the US can't act alone any more. At least Obama is aware of this. I have yet to see any fundamental policy changes to reflect this reality. Changes can be peaceful and satisfactory, or fanatics (nationalists and other malcontents) can rise up and drive countries into bizarre behaviours. Fanatics get this power when citizens realize that they have been living a dream and need to face up to a new reality. Accepting a loss of dominance is hard, very hard. But Americans are going to have to face this. And hopefully the fanatics won't gain control during the period of adjustment. (I'm pessimistic given the fanaticism shown by one major party, the Republicans, who are largely guilty for getting the US into the mess. This party shows no willingness to face reality.)

Cohen and DeLong invoke the quote, "If you owe the bank $1 million, the bank has you; if you owe $1 billion, you have the bank," then spend much of the rest of the book explaining why and how it's true. Along the way, they discuss the failure of neoliberalism, which sought to transfer portions of the control of the economy from the public to the private sector, skewer former Fed head Alan Greenspan, and describe with palpable awe the pandemic failure to oversee credit and banking in the United States and the major role it played - and continues to play - in our ongoing economic meltdown. The rampant corruption of the political system is also calmly recounted as a powerful catalyst for this dissolution and dispersal of American wealth.

Though both authors are academics, they're rather decent writers; DeLong is also a blogger who struggles online daily to make sense of various economic effluvia and ephemera with a combination of alacrity, disgust and amusement. But this book is far from a knee-slapper and unlikely to be chosen by Ms. Winfrey for her book club.

They cover a fair amount of ground here and their depiction of the loss of U.S. influence is tempered by their rational, non-alarmist manner. Though resistant to speculation on things that are obviously unknown and unknowable, the pair does spell out the fading power of government and private industry to collaborate on industrial and scientific innovation. The authors leave any horrific conclusions and sensational scenarios to others.

The absence of requisite funding will hit this area quite hard, they surmise. The natural constituency for this alarm might be found in either political party, though both are focused on other things. They may eventually wake up just in time to do nothing but howl and raise impotent ire, however.

Overall, the loss of U.S. dominance due to lack of governmental largess might promote more multilateralism, as we become just another country, rather than the planet's sole superpower. It may force some of our beneficiaries to stand on their own and opponents to focus inward. It may also further the domestic growth of China as their credit ceases to subsidize and support our consumption of their consumer goods. After all, it's a very big country and is already growing faster than any economy on the planet.

Cohen and DeLong's interesting look at the real New World Order is worthy of consideration as it describes a reality that's fast approaching.

The Asian export-led growth model must -- over time -- transform itself to domestic consumption and prosperity models. The American borrow-and-import model will also have to shift -- again, this takes considerable time -- to a model of consumption-at-the-level-you-produce. And the need to keep the confidence of those who have the money that their money is well placed in the United States serves as a constraint on U.S. policy in a way that it has never been before.

In the last three paragraphs of the book the authors describe the various stimulus attempts as something that will "buy time," but will not be sufficient to alter this basic trajectory.

The End of Influence - By Brad DeLong and Stephen Cohen | Foreign Policy: For more than a quarter century now the countries of the world have been dreaming the neoliberals' dream. They have been trying to shrink their states back to their core competencies to promote economic efficiency, global economic integration, and growth, and to slash through red tape, rent-seeking, and simple corruption. They have been actively privatizing state holdings. They have hugely reduced their ownership and their active involvement in "national champion" companies. They have cut back on interventions to affect market outcomes and on regulation to scrutinize and control market players.

But now they are waking up. And the neoliberals' dream is at an end.

To understand why, we need to journey back to the mid-20th century. The coming of World War II ensured that whatever money still remained in Britain left quickly. Franklin Delano Roosevelt ruled an isolationist country that he wished to cajole into engaging in the war with Hitler as early and as completely as he could. But part of Roosevelt's strategy (and a not-altogether unwelcome consequence, for many who worked in the State, War, and Navy Building-a Victorian-era structure just west of the White House that looked like a French brothel) was to make Britain broke before American taxpayers' money was committed in any way to the fight against Hitler. Only after Britain had sold off the family silver to pay for the nozzle would America "lend" Britain its garden hose to fight the Hitlerian fire.

America did come to the aid of its closest, cherished, and most important embattled overseas ally after Britain was broke. The Grand Alliance was the great moment in the grand story of the English-speaking nations. It does remain Churchillian in the inherited grandeur of its narrative. And America did come to the rescue of England, and together-with enormous although unloved assistance from the Red Army of the Soviet Union and Josef Stalin-America did save the world from the horrors of the Nazis. But while we were gearing up to come to the rescue, we squeezed the British, and when World War II was over, the United States, not Britain, had the money. When the British borrowed money from us, it had to be repaid in dollars, not in sterling. And imports into Britain had to be rationed well into the 1950s.

Will the United States be similarly squeezed? No. We are not engaged in a total war. We do not domestically produce only 1,200 calories of food per citizen per day. We are still by far the world's largest national economy. The United States is technologically powerful and resourceful and is still the center of world finance. World finance is still transacted in dollars. And the United States remains the world's only military superpower, whatever that may turn out to mean.

But the United States is losing the money. America is now massively in debt to foreigners and will be more in debt with each passing year as far into the future as forecasters can see. It will not be squeezed as it squeezed Britain, but it will be constrained.

Back when the United States had the money, it used it to pay attention to other governments only when it chose and to make certain that other governments paid attention to the United States even when they wished to not so choose. With the Marshall Plan, America made Western Europe an offer that all but forced Western Europe to adopt the mixed-economy social-democratic order of the post-World War II North Atlantic. It financed and arranged "regime change" in lesser countries to remove governments that seemed to be veering off into serious error. In all this, the United States used the leverage of having the money exclusively for the global greater good.

Who has the money now? What can they do with it? What are they holding? The smallest big batch of money held by other people is simply cash: greenbacks. Perhaps $450 billion, perhaps more, circulates abroad in cash, in hundred-dollar bills. Some countries, such as Panama and Ecuador, have formally gone over to a dollar economy. In other countries (such as Lebanon), cash dollars are widely used. Then, of course, many individuals and organizations prefer the anonymous convenience of hundred-dollar bills: drug dealers; arms merchants; Russian operators; Argentines and Eastern Europeans with doubts about their local currency; rich and not-so-rich Chinese, who live in a cash economy where the largest Chinese currency note in circulation is 100 yuan (about $15). Though not often discussed in polite company, seigniorage, that is, the ability to coin or print cash (the right held by a feudal seigneur) and have other folks hold it, is valuable: Those who hold the $100 bills have, for many, many years, been providing a substantial loan to the U.S. government -- and it's interest free!

The bigger big batches of dollar-denominated and U.S.-located assets -- and they are very big indeed -- are not cash but are rather investments. A great deal is held by private foreign individuals and organizations: Japanese housewives, German doctors, Scottish pension funds, Dutch companies, Colombian drug lords, Japanese insurance companies, sons of Gulf sheiks, and Russian "businessmen."

This money is private money. It belongs to market players -- people, companies, organizations, and institutions looking for the highest returns at the lowest risk. Much of the money is in the hands of the governments and rulers of oil-producing states (or in the hands of whatever or whoever holds their money). Truly great piles of U.S. obligations are in the hands of the governments of Asia. Japan holds about $1 trillion in reserves (which comes to almost $9,000 per U.S. household). Taiwan, Hong Kong, and Singapore together hold something like $500 billion. Korea sits on another $200 billion.

But it's China that is the biggest holder of U.S. obligations, with some $2.5 trillion in "reserves," the lion's share of it in U.S. debt obligations. America owes unimaginably large amounts of money to lenders (such as China), about $20,000 per American household, three-fourths of China's GDP, a fact worth repeating, a fact that makes rapid repayment impossible.

Proverbs 22:7 instructs us: "The borrower is servant to the lender." But the lesson requires some exegesis to fit smoothly into context. The burden of the U.S. foreign debt may be better explained by the oft-repeated Wall Street wisecrack, which we repeat: When you owe the bank $1 million, the bank has got you; when you owe the bank $1 billion, you've got the bank.

Neither side can walk away; we're locked. The debt binds China especially and other governments that have the money. Selling the debt would send the dollar way down and thereby destroy the value of their dollar holdings and severely damage their economies' massive export-based sectors. Worse yet, sell it for what? Their "reserves" are so huge that there is nothing else they can hold them in, not at that scale. From a Chinese viewpoint, it's exasperating.

The U.S.-China economic imbalance has forced the two powers into a very intimate and not very desired embrace, something Lawrence Summers once called a financial balance of terror. This is all to the good: The two powers must learn to work as partners, and not just in economic matters -- global warming and global order also need positive Sino-American cooperation, and they are much more important long-term issues. Sino-American partnership, in managing the complex mess of their imbalanced economic codependency, can constitute a good beginning for managing the utterly unhinged problems of world balance and order. We have no acceptable choice but to get good at it, and that will take some doing on both sides.

As money alters power relations, the United States is not simply becoming dependent -- but it is no longer independent, either. That is a major change. And China is no longer helpless and cowed in face of the superpower hegemon; it has got a grip on it. Indeed, while the world peeks in, the two countries are realizing that they have thrown themselves into an intimate economic embrace with, to say the least, very mixed feelings.

For the past 30 years, America rather successfully propagated to itself and others a worldview of unfettered markets and "re-fettered" states: Expand the realm of markets in society and roll back the reach of other institutions, especially government. They backed that worldview with money and, until it crashed, this American outlook was willingly adopted by more and more people and governments around the globe. Soft power -- not military might, not straight-out money, but the ability to inspire acceptance and imitation -- was a vital component of American international dominance. It soothed the abrasiveness of military and economic power and made the wielders of such power feel good.

Money, of course, is power. Because America had the money -- had it solidly, rightfully, self-assuredly, and durably -- for about 100 years, people all over the world wanted to be like Americans: successful, modern, loose-jointed, efficient, democratic, socially mobile, leggy, clean, powerful, and, of course, rich. Money brings a nation power, not just the power to command, or at least influence, the behavior of other nations. And when the money accumulates over time and as a result of real economic success, and not just windfalls from guano or oil deposits, it brings the power to propagate, consciously or not, the ideas, concerns, fashions, norms, interests, amusements, and ways of displaying and behaving that come out of its culture. These penetrate deep down into other cultures as well as its own; they become part of daily life. This is luxuriant power: It doesn't have to be exercised willfully or even consciously, and it doesn't even cost anything extra. It was clearly the way to be.

As the United States emerged in the aftermath of World War I as the top power and giant money master, American jazz swept through Europe, faster than Ford and Kodak. Later, especially after World War II, Europeans eagerly welcomed the onslaught of American movies. Most Europeans encountered America at the movies, but two generations of rather privileged Europeans traveled to America to see for themselves (many sponsored by the State Department), to behold the skyscrapers of New York, the George Washington and Golden Gate bridges, and the houses of rather ordinary people with huge shiny cars, washing machines, televisions, and the orthodontically enhanced smiles on tall, milk- and meat-fed women.

American cultural dominance has continued to grow. Teenagers around the globe now uniformly dress in styles pioneered by American teens and have even adopted the same body language. They eat on the street. The American-designed, Asian-manufactured iPods fill their heads with the same harsh music; they instant-message, blog, and Tweet. And the English language -- not altogether an American cultural invention -- is not merely the international language, but also the second language for a vast global population: Languages carry more than their words and grammar; they carry cultural form and content.

America will be less and less the origin of new cultural trends or global memes: First, because the others now have the money. But also, because while America remains especially modern, the modern is no longer especially American; it is rapidly becoming semiglobal and if not old, at least very mature. There is no need to leave China to see skyscrapers; there are more of them in Shanghai than in New York, and they are newer, taller and bolder. The energy -- that key element in New York 1920s literature (e.g., Dos Passos) has, with the money, shifted its residence. For the foreign traveler now arriving at New York's Kennedy airport, the ride into Manhattan is still eye-opening, but in a new way: litter and slums line the Van Wyck Expressway through Jamaica, Queens, where rust and graffiti festoon the old transit trains and bridges; the roads are poor; there is no proper train into town -- let alone something as sleek and fast as in Hong Kong or Shanghai. Hollywood no longer has an inherited, built-in meganarrative -- the presentation of life in modernity in all its weird and quotidian forms: How women walk and speak, houses, murder, seduction, sex, kitchens, raising children, "making it," excursions, courtrooms, shopping centers, schools, hospitals, universities, and office buildings -- the world, perhaps of your future.

The culture created by America and exported by its movies is not gone; it's not even going. It has simply gone universal and is now open to a vastly expanded range of contributors. This is very likely to be a good thing for American and world culture, an opening to new ideas, talents, and energies. And America's ambient culture is being enriched by foreign imports ranging from soccer to sushi, not to mention energetic Ph.D.'s in material and biological sciences.

America is sure to remain a leader in cultural power, but there is a difference between being a cultural leader and an easy, almost un-self-conscious cultural dominance. Our research universities are the envy -- and model -- for the world. So too are our high-tech, biotech, and nanotech genre Silicon Valley-type firms, with their multinational, multiracial, and monocultural workforces of the bright, ambitious, educated, and driven. And there is also a powerful emergent American cultural force best represented by Barack and Michelle Obama: America might yet develop new meganarratives to succeed the world of modernity that will seize the world's hearts, fears, longings, and energies. But no matter how creative its creative people become, as in the realms of economic and political power, America is unlikely to remain the cultural hegemon, the overwhelmingly dominant source of cultural memes.